The construction sector accounts for about 15 per cent of the economy and the weak number suggested next week's gross domestic product (GDP) report was likely to be a soft one.
The value of construction work fell 2.6 per cent in the quarter to a seasonally adjusted A$30.14 billion ($25.8 billion), compared with a forecast rise of 1.5 per cent, data showed on Wednesday.
It was still 5.9 per cent higher than a year earlier and the Bureau of Statistics revised first-quarter growth up to 5.0 per cent from 2.3 per cent previously.
"Taken alone, today's data suggest some downside risk to our 0.5 per cent forecast for second-quarter GDP, but there are plenty of data feeding into the GDP report to come over the next few days," said Spiros Papadopoulos, an economist at National Australia Bank.
The Australian dollar dipped to $0.8560 from around $0.8580 before the data, while bond futures gained on expectations that rates would be lowered in the coming months.
Financial markets are fully pricing in a quarter per centage point rate cut when the Reserve Bank of Australia's policy board meets on Sept. 2, and the figures kept alive those expectations. The cut in rates would be the first in seven years.
The cash rate is at a 12-year high of 7.25 per cent.
Second-quarter capital expenditure figures on Thursday and current account and business profit figures early next week will give further insight into the GDP number.
A Reuters survey forecast GDP would grow 0.3 per cent in the second quarter, half the pace of the previous quarter and the slowest in more than two years. The GDP report is due on Sept. 3, a day after the central bank meets to decide on rates.
The slide in construction activity was driven by a 6 per cent fall in spending on engineering projects, such as roads, ports and mines.
Spending on buildings was also sluggish in the last quarter, with a 0.3 per cent rise in non-residential projects such as offices, hospitals and shopping malls. Residential activity also climbed 0.3 per cent.
"The major surprise was the fall in infrastructure activity. This is at odds with the sizeable and rising pipeline of work outstanding," Westpac said in a note.
Disruptions caused by a major gas outage in western Australia during the period may also have been a factor, Westpac said.
Apache Corp suffered a blast at its Varanus gas plant in June that knocked out a third of the gas supplies to a key mining region. The RBA last month estimated the outage would subtract about a quarter per centage point from economic growth.
Still, the data showed there was also a big pipeline of projects in the works, pointing to some resilience in the sector.
Work yet to be finished stood at A$41.77 billion at the end of the second quarter, up 2.4 per cent from the previous quarter. Building work approved but not started was flat, giving total work in the pipeline of A$51.27 billion.
"While tomorrow's business investment survey probably will show a healthy 4 per cent rise, many firms probably will trim their investment plans a little given the painful spike in energy prices, growing doubts about the resilience of the global economy, and the slump in business confidence," said Stephen Walters, chief economist at JPMorgan.